TJ Moruzzi
Virtual data rooms are essential in mergers and acquisitions, but we do not always give them enough credit.
When buying and selling companies, there is a ton of information to manage. Virtual data rooms, also called data rooms, assist with this task. They are similar to private online storage areas where documents related to a deal are securely stored.
These rooms are on the internet, and the data room owner decides who gets access to what. It is like a secure way of sharing crucial information during a deal. The owner uploads files and documents beforehand, and more can be added as per requirements.
Without virtual data rooms, handling so much private information in big deals would be tough. They simplify access to the necessary data, even from remote locations, which is extremely beneficial for large projects such as mergers and acquisitions.
What Are Buy-Side And Sell-Side In A Deal?
Understanding the difference between buy-side and sell-side in M&A is important. It helps in:
- Talking more effectively
- Knowing what to expect in a process
Let’s figure out what makes the buy-side and sell-side different in M&A.
What Is the Buy Side Deal?
The buy-side means financial companies that help their clients find good opportunities to acquire and finish a deal and put things together. This includes private equity firms, pension funds, asset managers, hedge funds, venture capital firms, institutional investors, and regular investors.
Example: Imagine an investment firm that invests in alternative energy companies. One day, someone from a big investment bank tells them about a new company in alternative energy that is about to go public.
What Is The Sell-Side In A Deal?
The sell-side is when companies look for people who want to buy what they have. They study an industry and a company, make materials to market it, and help in negotiating the deal. The sell-side includes M&A advisory firms, investment banking, commercial banking, market makers, and companies.
Example: An investment company wanted to sell one of their companies, so they asked an investment bank to lead the deal. An advisory firm was hired to do detailed research for selling the company.
Overview of Buy-Side Vs Sell-Side
Buy-side and sell-side differ significantly in their goals, tasks, roles, companies involved, and participation in due diligence and integration processes. Let’s explore their key distinctions in detail.
- Objective of Buy-Side and Sell-Side: The primary goal of a buy-side analyst is to identify a company that aligns with a client’s acquisition goals and offers optimal investment returns. On the other hand, a sell-side analyst aims to sell securities or a company at the best possible price.
- Main Tasks of Buy-Side Companies vs. Sell-Side: While both sides share a common goal of a beneficial deal, their activities may overlap. Buy-side analysts typically handle fund management, internal research, M&A strategy creation, sourcing acquisition targets, due diligence, negotiation, and integration. Sell-side firms assist corporate clients in raising money, major transactions, industry analysis, private equity research, company valuation, financial modeling, outreach to potential buyers, pitching acquisition opportunities, coordinating due diligence, and facilitating the overall M&A procedure.
- Financial Companies Involved: Buy-side firms may include private equity firms, hedge funds, life insurance companies, institutional investors, pension funds, mutual funds, and retail investors. On the other hand, sell-side entities generally include investment banks, stock market brokerage firms, commercial banks, M&A advisory firms, market makers, and corporations with corporate development teams.
- Roles in Buy-Side Compared to Sell-Side Firms: Roles in buy-side teams may include portfolio managers, asset managers, buy-side researchers, M&A-specialized lawyers, due diligence specialists, and fund managers. Sell-side teams may include sell-side analysts, investment bankers, M&A advisors, financial analysts, marketing specialists, lawyers specializing in M&A, due diligence specialists, and an execution team for logistical and administrative functions.
- Risks in Buy-Side and Sell-Side: Both sides face risks in M&A deals. Sell-side risks include misevaluation, exemplified by the Mattel and the Learning Company merger. Buy-side risks encompass poor integration processes leading to cultural issues, as seen in the failed Daimler and Chrysler merger and due diligence oversight, illustrated by the Caterpillar and ERA merger.
In summary, the buy-side and sell-side play distinct roles in mergers and acquisitions. Each of them contributes to the overall success of the transaction while navigating specific challenges and risks.
The Role Of Analysts In Sell-Side And Buy-Side
Selling a company is a complex task. Commonly, the sell-side investment bankers need to address questions like “Who should buy the company?” and “How much should it be sold for?” before approaching potential buyers. They must also present the company effectively.
Experienced investment bankers, with insights from successful transactions, are adept at handling challenges in the selling process. It is crucial to study how investment bankers practically sell companies.
Stock market analysts, also called investment analysts, help individuals and professionals decide whether to buy or sell market assets. They gather information from public sources (like market data and company publications) and exclusive channels (like investor meetings and negotiations). Analysts who provide valuable insights either sell this information directly to private investors (buy-side analysts) or brokers and intermediaries (sell-side analysts working for sellers).
How Does A VDR Benefit Both Sides In An M&A Transaction?
Virtual data room software is a secure online platform. It allows both the selling and buying sides to access sensitive documents and data related to the M&A transaction, ensuring seamless due diligence and integration processes.
Let’s consider key benefits for both sides in real M&A cases.
A buy-side example is an e-commerce software provider and ecosystem for e-commerce apps. They use VDR service for:
- Enhanced professionalism
The buyers tried out different virtual data rooms, but they still encountered surprise expenses, had trouble bringing new members on board, and made repeated requests due to poor organization. They were looking for a solution to increase professionalism in the eyes of their targets. Due diligence tools, audit logs, and analytics from DealRoom helped AppHub increase efficiency, quality, and accuracy.
- Enhanced communication
With a data room, it is easy to discuss everything on one platform, the onboarding process is swift, and communication with different parties is organized.
- Real-time document exchange
A virtual data room facilitates any requirements for document storage and distribution. Document requests and reviews are made on the platform without multiple email exchanges and downloads. With DealRoom, AppHub eliminated redundant requests due to live updates and filtering.
A sell-side example is a leading market analytics provider for the real estate industry. The reasons they use VDR software are:
- Better insights
The sell-side can check what documents were viewed and how much time was spent on each page. The sell-side was interested in tracking how buyers engaged with their documents and the progress of each bid.
- Competitive advantage
With a virtual data room, the company can exchange information with several buyers simultaneously and react to emerging opportunities super-fast. Data room deployment takes 15 minutes, and hundreds of new users can be added in a minute. Besides, the sell-side’s documents are regularly updated and always ready for the latest offers.
- Control
VDR provides advanced permission management features. A company can control individual access to documents and even pages in a data room. In 2015, a growing company considered both buy and sell options, so it was essential to have an easy and secure platform to handle all opportunities.
Get Your Buy-Side Data Room Setting Up
To make the M&A deal more organized, virtual deal rooms are used as the best solution for buy-side companies.
A well-organized approach to M&A increases their chances of:
- Finding the right companies
- Doing accurate valuations
- Having a successful due diligence process. Virtual data rooms ensure all these processes are connected to lead to valuable deals.
Steps To Set Up Your Buy-Side Virtual Data Room
- Create a folder outlining the strategy goals.
Many companies forget This important first step when setting up a buy-side due diligence VDR. Having this folder helps everyone on the buy-side team remember why they are looking for a deal and whether they are staying on track with their goals.
- Create a folder with a short list and a long list of potential companies.
Here, any information from initial talks with potential targets can be added. It does not need to be big; a single Excel sheet may be enough, depending on how many companies have been contacted and how much contact has been maintained.
- Make a different room for each target.
Creating separate data rooms for each stage and target and organizing them with a logical subfolder system can significantly enhance your deal process.
For example:
- Valuation,
- Due diligence,
- Transaction documents, Change management, and so on.
- Create a detailed subfolder structure.
In the subfolders above, due diligence should have several of its own subfolders. For example:
- Legal due diligence
- Operational due diligence
- Financial due diligence
- HR due diligence, etc.
Sell-Side Data Room Setup
Sell-side companies use virtual deal rooms to make their information more efficiently accessible to other companies. Access to the sell-side virtual data room should be restricted, but for authorized users, it should demonstrate the company’s competence and commitment to transparency in its operations.
Steps To Set Up Your Virtual Data Room For Sell-Side
- Make a folder that displays the location of the process
This might be a straightforward Excel document. It shows the sell-side group in which companies have been approached, shown interest in, or otherwise, similar to the buy-side document that outlines a long list and short list of purchasers.
This is only for internal use and should not be shared with potential buyers.
- Make a folder that outlines the preliminary steps needed to start the sales process.
This typically includes a few files, such as:
- A sales memorandum (the buy-side will probably have seen this).
- A teaser document.
- A valuation of the firm (preferably conducted by a third party).
- Begin organizing the firm’s information into distinct folders (that match the ones mentioned in the section above on the buy side).
Among them are legal documents, operational documents, financial documents, and HR documents. - Provide access to your own sell-side crew and ask for comments.
Some team members may believe further details should be included. - Give access to prospective customers who express genuine interest.
Before being granted access, each person must sign an NDA. To preserve the integrity of its contents, ensure that the virtual data room is only accessible by individual corporate emails.
Top 5 Best Virtual Data Room Providers in 2024
Final Thoughts
Whether your company is buying or selling, using a virtual data room can make a big difference in your M&A process. For this reason, these tools are widely considered best practices in the industry. They demonstrate to the other party involved in the transaction that you are a trustworthy and sincere ally. By implementing a high-quality virtual data room for your company, you will see how it improves transactions from the beginning to the end of the deal.
